The impact of COVID-19 on different industry segments has not been uniform and within the sectors the effects have been varied. CEOs at the helm of digital-ready businesses were able to deliver superior business performance while others who were quick to respond to the government impetus on economic recovery, saw a correspondingly better pay hike.
CEO compensation is increasingly driven by reward elements that aligns their remuneration with long term business performance and shareholder's interests.
If the larger population of India Inc has traversed an incredibly difficult and uncertain last 15 months, one can only imagine the turmoil, trials and tribulations that Indian CEOs must have gone through, as they steered their respective ships in the most choppy and fearsome waters ever experienced in their lifetimes. We are still reeling from the devastating aftermath of the second wave of COVID-19 and the concerns over a potential third wave remain around the corner, though the panacea offered by vaccinations and faster recovery seems to be allaying fears and feeding fortunes much better than what we had experienced in the middle of 2020.
To their credit, India Inc CEOs have demonstrated that they can deliver solid performance and returns for the stakeholders even in a seemingly interminable period of extreme business uncertainty. We saw that the boards’ responses to CEO remuneration was measured and their approach has provided much needed resilience to the executive remuneration against the once in a lifetime event like COVID-19, that has shaken the world and brought businesses to their knees.
In the recently concluded Aon’s Executive Compensation survey, with over 500 organizations participating across different industries, the results revealed that organizations preferred a long term view while making remuneration decisions for their top leadership and consequently, the executive pay increases saw some moderation but still a 5% increase in 2020-21 (as compared to 8% in the previous cycle).
The impact of COVID-19 on different industry segments has not been uniform and within the sectors the effects have been varied. CEOs at the helm of digital-ready businesses were able to deliver superior business performance while others who were quick to respond to the government impetus on economic recovery, saw a correspondingly better pay hike. In our study, the top quartile among the CEOs saw a net compensation jump of ~8% which is similar to the average budget hike pre-COVID.
Based on our repository of year on year data, we also tried to see what are the long-term changes to executive pay and pay structures. A 5-year sectoral analysis from 2015-20 suggests that Consumer and Life Sciences have witnessed the fastest growth in the CEO pay (1.6-1.7x), while Financial Institutions have been on the lower end with an average movement of ~1.25x over 5 years. We also saw scale playing an important part in determining the CEO pay structures. CEO salaries managing large vs. small businesses continue to diverge with the result that the CEO Pay approximately doubles as we compare CEOs managing revenue less than 500 Crores to CEOs managing turnovers between 1000-5000 crores. The difference in pay is exponential and in CEOs managing scale of 20,000 crore and above earns 5 time more than an average CEO. The divergence in salaries is also reflected in ‘Pay at Risk’ which strongly correlates with the size of business.
The focus on incentives in the CEO pay structure becomes especially important considering the fact that for the past 15 months, organizations have struggled to put accurate forecasts and therefore had to make dynamic adjustments to the plans throughout the year. Boards are recognizing some of these challenges and with the added push from regulatory bodies and shareholders, CEO compensation is increasingly driven by reward elements that aligns their remuneration with long term business performance and shareholders’ interests. Long-term incentives (LTI) for Indian CEOs are now equal to their base salary in overall compensation awards. This has been a major long-term shift as 5 years back the LTI component was only half of the base salary for these roles. The overall compensation for the Indian CEOs is still far behind the global standards in terms of leverage, but if the trend continues, LTI would become the major driver of of CEO pay going forward.
Data on organizational heritage demonstrates that India HQ firms have shown tremendous growth in the past 5 years (from a comparison of over 200 both listed and private firms). A deeper dive into the privately managed companies show that in case of Indian heritage organizations, their CEO salaries have now caught up with their MNC counterparts. The CEOs of Indian Private companies in 2015-16 were earning on an average 87% of the salaries of their MNC (private) counterparts but a corresponding comparison in 2020-21 shows that Indian CEOs now earn marginally higher at 103% of the MNC (private) CEOs.
The crucial question is how boards and management teams are preparing themselves in the midst of continued uncertainty. Companies are treading cautiously in preparation for the planning season for FY 22. The unprecedented severity of the second wave of COVID-19 did raise concerns on FY 22 recovery plans. With benefit of hindsight, the aftermath indicates that its impact on businesses has been less severe. The productivity loss has been reduced to a few weeks compared to the losses of many months due to the nationwide shutdown during the first wave. Keeping all these factors in mind our survey of the initial projections for next year indicates that the leadership pay budgets are creeping towards the pre-pandemic budgets and will probably take a few cycles for a full recovery. The projection for the immediate next year is however a slight increase from FY 21 at 6%.
What remains stable however are the long-term evolutionary trends, driving the executive pay in India. Regulatory oversight is forcing boards to manage executive pay proactively especially in sectors most affected by governance challenges e.g. Financial Institutions. Recent SEBI and RBI decisions point out to the fact the regulators would provide more prescriptive guidance in the area of executive remuneration along with close monitoring of board decisions. Some other meta drifts include a continued increase in ‘Pay at Risk’ portion of the total remuneration and a slow crawl towards aligning executive salaries to the global standards of long-term incentives. These changes are in-line with the core fundamental changes across the world to appropriate the executive remuneration with the time frame for performance/risk manifestation of the decisions taken by the management teams.
Going forward, while it is hard to predict how investors will evaluate the compensation decisions in exceptional times like today, the best advice for boards would be to remember that the shareholders have always valued transparency. And transparency in turbulent times is all the more needed. This makes disclosures a critical factor to avoid any unwanted controversies. A solid internal governance framework which guides the board committees as well as communicates to the shareholders how the board arrived at their decisions would be vital to engage and drive greater acceptance among the shareholders and their advisors. And that is the best way boards can manage the pay decisions of their CEOs who continue to lead from the front, adopt agile ways of working, demonstrate compassion and empathy, and yet remain resilient in their measured march towards normalcy.
